Make a Cash Budget:

CASE STUDY Imagine it is now 31st March 2022. When Mark left university, he decided to run a business selling and repairing computers. In order to do this, he set up a limited company, Datahelp Limited. He planned to deposit $100 in the company's bank account on 1 January 2022 and issue 100 shares, with a nominal value of $1 each, in his own name. He also planned for the company to borrow $8,000 from his father Mark planned to rent premises for his business at $2,000 a month and lease test and IT equipment for $600 a month. He would pay $4,000 for signage and furniture. For each of the first two months he would spend $7,500 on computers for resale and components for repairs. In the third month he hoped to buy $7,000 of computers on credit. At the outset, he would hire a technician, at a cost of $2,000 a month, to do the repair work, whilst he mostly dealt with selling and administration. He would pay himself E1,000 a month in salary and planned to take further income as dividends. He estimated that he would use $200 worth of electricity per month and expected to get the first bill at the beginning of April. He would pay $1,200 for 12 months' insurance. Other expenses paid for during the first 3 months would be: E per month Rates 333 Utilities (excluding electricity) 300 Advertising 300 Mileage (not deliveries) 250 Each month he hoped to sell computers for $8,667 and charge $2,500 for repairs At the end of 3 months he estimated that he would have inventory, of unsold computers, which would have cost him $10,000 He estimated that wear and tear on the long-term assets of the business would amount to about $800 a year, so they would need replacing after about 5 years (5 x $800 = E4,000) Now that he has been trading for 3 months, Mark has produced a budgetary control report and cashflow statement for the 3 months and a Statement of Financial Position for 31st March and he has calculated some key financial ratios. These are shown below.He spent an extra $1,000 on advertising, which increased the volume of both sales and repairs by 20%. Mark's father would very much like his $8,000 back, so Mark needs to consider how he might be able to repay the loan. He has no other family or friends able to provide funding. Datahelp Ltd Budgetary Control Report for the 3 months to 31 March 2022 Budget Actual Variance E E E Sales Revenue: Sale of computers 26,001 31000 4,999 Fav Repairs 7.500 9000 1,500 Fav 33,501 40.000 6,499 Fav Opening inventory 0 0 0 Purchases 22,000 27,300 5,300 Adv Technician salary 6,000 7,200 1,200 Adv Closing inventory (10,000) (12,000 2,000 Fav Cost of Sales 18,000 22,500 4,500 Adv Gross Profit 15,501 17,500 1,999 Fav Operating expenses: Rent 6,000 6,000 Leasing of equipment 1,800 1,800 0 Mark's salary 3,000 3,000 0 Electricity 600 620 20 Adv Insurance 300 300 0 Rates 999 999 0 Utilities (excluding electricity) 900 880 20 Fav Advertising 900 1,900 1,000 Adv Mileage 750 760 10 Adv Depreciation 200 200 0 15,449 16,459 1,010 Adv Operating profit 52 1,041 989 FavDatahelp Ltd Statement of Cashflows for the 3 months to 31 March 2022 E E Cash flows from operating activities Profit before interest and income taxes 1,041 Add Depreciation/impairment of assets 200 Decerease in receivables (900) Decrease in inventories (7,400) Increase in trade payables 7,620 Net Cash from Operating Activities 561 Cash flows from investing activities Signage & furniture (4,000) Net cash used in investing activities (4,000) Cash flows from financing activities Issue shares 100 Loan 8,000 Net cash used in financing activities 8100 Net increase in cash and cash equivalents 4,661 Cash and cash equivalents at 1/1/22 0 Cash and cash equivalents at 31/3/22 4,661 Financial Ratios at 31 March 2022 Acid test 0.73 ROCE 11.39% Gearing 87.50% Gross profit for repairs 31.10% Gross Profit for computers 50.60%